$1 raise vs. $1 reduced expenses

[corn18]

We've talked about this before, but recent events for me have highlighted in my budget spreadsheet.

I may get a $25,000 / year raise in March 2018. Net after taxes is $11,250. That's how much shows up as excess at the end of the year.

I may also be moving to a state where there are no state or local income taxes. That would mean I pay $25,000 less in taxes. And the wonderful part: that $25,000 shows up as excess at the end of the year. Not just $11,250. That's equivalent to getting a $45,454 raise.

Now if I can just get rid of this pesky mortgage. That would be equivalent to another $45,454 a year raise.

Carry on.

BTW, where is TexasHusker these days? We may be neighbors next year.

[disneysteve]

BTW, where is TexasHusker these days?

I was wondering that too. He disappeared. The site has been pleasantly free of sarcasm the past month.

[Gailete]

This is one of my goals this year. To decrease expenses and increase income. I've already signed up for my Medicare drug plan that should save me around $1000/year. That is $1000/year we don't have to come up with. Also need to see about lowering my car, house and rental insurances and hopefully come up with another $1000+ in savings. When you are on a 'fixed income' where our COLA that I will see this year, $2/month, it is imperative to decrease expenses since the cost of everything else is going up. I'm not sure of all the places we will be looking for places to save, and I don't know all the places I can have more coming in, but I know I can't assume each year, that something will break free and we have all that we need to live on. No wonder so many just get deeper in the hole as they just sit back and assume they are stuck and can't make any life changes when you are on low fixed income.

I also don't want to be like some that you see on PBS type documentaries where the person is boohooing about not having any money, and you see the flat screen TV, the ash tray is full, they mention going the welfare office to try to get help as they are so far in debt and of course stop off at McD on the way home for lunch. They are also sucking down beer or pop and even though they don't go out to work their home looks like a pigsty, and of course cell phones for all! I have much compassion for those that really need help and are doing everything they can to help their family, but those that are trying to live like the TV families that they see, don't understand that it is just a fantasy and not something to try to attain to.

[Tabs]

The site has been pleasantly free of sarcasm the past month.

It's the wacky politics I can't stand. It's one thing to say something is good or bad because it costs more or less. It's another because the liberals suck and the conservatives are awesome, and that's why you should do this instead of that.

[Milly]

A Penny Saved is 1.57 Pennies Earned

There is a long standing understanding that a penny saved is a penny earned. I submit that the statement is false. Here’s why:

When you save a penny by substituting out cheaper alternatives, using coupons, or other means, you become one penny richer.

When you earn a penny, it must enter a pool of tax piranhas before you can take a fraction of it home.

Let’s start at the Federal Income Tax
When looking up my effective tax rate of 2% on my federal tax return, I really don’t feel that bad about taxes. To make me even happier, it has been going down every year since we were at 7% in 2013 (before we had 3 babies).

Since we are talking about the marginal level, we will ignore the effective tax and look only at the tax on that last penny earned. For most Americans, this is a 15% tax ($18,550-$75,300 taxable income for 2016).`

Social Security & Medicare Tax
Also taxed at the federal level and collected by the IRA are the Social Security Tax (6.2%) and the Medicare Tax (1.45%). This is a flat tax with no brackets or caps until $118,000. These taxes are in addition to the federal income tax and neither one is deductible from the other. The vast majority of Americans pay the sum total of a 7.65% tax towards these funds.

State Income Taxes
Each state has its own income tax and tax brackets ranging from 0-13.3%. I’m going to use California as an example. The average Californian household income was about $64,500 in 2015 (source), If they don’t have a $4,522 worth of deductions, that puts them in a 6% tax bracket ($59,978-$83,258). Now that we can't deduct our state taxes, this is added straight on top of the other taxes.

Running Total: 28.65% tax

Unfortunately, that’s not the end of the story…

Invisible Taxes
Yup, we have those too. It turns out businesses must also pay additional Social Security and Medicare taxes when they pay you. Your employer sends off both portions before you see any money. Although one is “paid by company”, the company sends both portions out of your wage by simply paying you less. This adds another 7.65% tax, bringing you up to a running total of a 36.3% tax.

Corporations also pay an”income” tax. Economists debate as to how much of that tax is actually transferred to the workers and how much is “paid” by the share holders, but 20% of the 15%-35% tax is a pretty good estimate (source). Because I have no clue how to estimate how much earnings per employee is a good estimate, I’m going to leave off this tax in my numbers.


A Penny saved is 1.57 Pennies earned!
With a tax of 36.3%, you would have to work the equivalent of a 1.57 cent wage to take home 1 penny.

$0.0157 * (1-0.363) = $0.01

There you have it, while earning extra money is really nice, much of it disappears long before you see it. Dollar for dollar, saving is a more powerful tool.

Limits
Obviously, there is a limit to this method. Saving money isn’t really saving money if it leads to a more costly alternative. Ignoring the oil changes and being forced to buy a new engine, is obviously a bad idea. Sometimes you have to spend money to save money.

It is also important to note there is only so much money you can save and infinite money you can earn. It is also true that there is infinite money you can want to spend. You can have a million dollar salary and still be broke. Where to focus your efforts, depends on where you are on your financial journey.